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Hard-Earned Income and Tax Compliance: A Survey in Eight Nations

  • Karl Landsteiner University

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Is the effort invested to achieve taxable income,a relevant factor for tax compliance? If the value of income increases with the effort exerted, reluctance to pay taxes should be high. On the other hand, if income is perceived as compensation for one’s endeavor, there is too much at stake to take the risk of being audited and paying a fine. Consequently, tax evasion should be more likely if income was obtained easily. These contradicting predictions were tested in a questionnaire study with samples from eight countries (Australia, Austria, England, France, Italy, New Zealand, Spain and Switzerland; N = 1,223). Results show that the effort exerted to obtain taxable income,and the aspiration level matter in compliance decisions. Hard-earned money,is more likely to be reported honestly to tax author- ities, particularly if the aspiration level can be satisfied by honest tax reporting. Keywords: tax compliance, tax evasion, effort, sunk costs, tax morale
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S. Muehlbacher et al.: Hard-Earned Income and Tax ComplianceEuropean Psychologist 2008; Vol. 13( 4):298–304© 2008 Hogrefe & Huber Publishers
Hard-Earned Income
and Tax Compliance
A Survey in Eight Nations
Stephan Muehlbacher
, Erich Kirchler
, Erik Hoelzl
, Julie Ashby
Chiara Berti
, Jenny Job
, Simon Kemp
, Ursula Peterlik,
Christine Roland-Lévy
, and Karin Waldherr
University of Vienna, Austria,
University of Exeter, UK,
University of Chieti-Pescara, Italy,
Australian National University, Australia,
University of Christchurch, New Zealand,
Université René Descartes, Paris V, France
Abstract. Is the effort invested to achieve taxable income a relevant factor for tax compliance? If the value of income increases with the
effort exerted, reluctance to pay taxes should be high. On the other hand, if income is perceived as compensation for one’s endeavor,
there is too much at stake to take the risk of being audited and paying a fine. Consequently, tax evasion should be more likely if income
was obtained easily. These contradicting predictions were tested in a questionnaire study with samples from eight countries (Australia,
Austria, England, France, Italy, New Zealand, Spain and Switzerland; N = 1,223). Results show that the effort exerted to obtain taxable
income and the aspiration level matter in compliance decisions. Hard-earned money is more likely to be reported honestly to tax author-
ities, particularly if the aspiration level can be satisfied by honest tax reporting.
Keywords: tax compliance, tax evasion, effort, sunk costs, tax morale
Without question, paying taxes hurts. It may particularly
hurt if one has had to work hard to earn income, whereas
money achieved rather easily such as from capital gains
may go as easily as it was realized. The question ad-
dressed in this paper is whether reluctance to pay taxes
varies with the degree of effort put into earning one’s in-
come. Are taxes on hard-earned income more likely to be
evaded than taxes on income achieved without any effort?
Or does the effort invested to earn taxable income deter
from evasion, since paying a fine following an audit would
further reduce effective income?
To enhance compliance, economic models emphasize the
importance of audits and fines (Allingham & Sandmo, 1972;
Srinivasan, 1973).However, the probabilityofbeing detected
is extremely low in most countries – for example, the audit
probability in the U.S. isestimatedto be about1% (Andreoni,
Erard, & Feinstein, 1998) and fines are relatively low. In
Austria, tax evasion is penalized with a maximum of twice
the evaded amount; the actual penalty, however, rarely ex-
ceeds 40% of the evaded amount. Nevertheless, the majority
of taxpayers pay their dues honestly. Tax evasion is lower
than the neoclassical economic model predicts. Thus, since
the early work of Schmölders (1960) and Strümpel (1966),
the focus of tax research is on determinants of tax morale
beyond economic variables. Subjective knowledge of tax
law, perceived distributive, procedural and retributive fair-
ness have been identified among other things to affect tax
morale and compliance (for a recent literature review see
Kirchler, 2007).
Another relevant factor in compliance could be the
workload or effort necessary to obtain taxable income. On
the one hand, it can be assumed that hard-earned income is
subjectively of higher value and consequently reluctance
to pay taxes may be especially high. On the other hand, if
the net income after honest payment allows compensation
for one’s sunk effort, the risk of being audited might deter
from evading taxes. In the study presented in this paper,
these competing predictions are tested in samples from
eight nations, which all differ in their levels of tax morale.
After elaborating our predictions in more detail, we com-
pare tax morale in the participating nations as measured by
our survey, and report results from testing the predictions
on the impact of effort on tax compliance.
Effort and Tax Compliance
Whereas from a rational perspective the value of income
should be independent of its source, psychologically it
DOI 10.1027/1016-9040.13.4.298
European Psychologist 2008; Vol. 13(4):298–304 © 2008 Hogrefe & Huber Publishers
makes a substantial difference, whether an outcome was
reached by luck or skill. In experiments by Loewenstein
and Issacharoff (1994), participants who were informed
that they had obtained a coffee mug for their performance
in a prior task, valued the mug more highly than those who
believed they had received it by chance. Further, partici-
pants who received a mug as a prize for exemplary perfor-
mance on a task valued it more highly than those who ob-
tained it regardless of their poor performance.
With regard to income, it can be expected that its value
increases subjectively with the amount of effort invested
to obtain it. According to findings on source dependence
in valuation of objects, hard-earned income should be of
more value than income obtained easily. Consequently,
paying taxes out of one’s own pocket should be perceived
as a loss. Within the framework of prospect theory (Kah-
neman & Tversky, 1979), it can be expected that in high
loss situations people are especially risk seeking and try
to avoid losses. The assumption of effort changing the
taxpayers value function is presented in Figure 1. The
payment of the same amount of taxes (–x) is perceived
as a more severe loss (V’(–x)) in the steeper value func-
tion for hard-earned income, than in the value function
for income obtained easily (V(–x)). Predictions on tax
behavior deriving from these assumptions are straightfor-
ward: Depending on the effort put into earning taxable
income, its (subjective) value and reluctance to pay taxes
increases. Noncompliance is therefore likely if hard-
earned income is to be declared.
A similar prediction is supported by research on sunk
cost effects. Though from an economic perspective, only
incremental, that is, future, costs should be considered as
decision criteria, Arkes and Blumer (1985) demonstrated
that investments of money, effort, or time made in the
past do affect actual decisions. In decisions under risk,
choices than an absence of prior losses (Thaler & John-
son, 1990). More recent research, however, points out
that sunk cost effects partly depend on the nature of prior
investments. Financial sunk costs should be distin-
guished from temporal (Soman, 2001) and behavioral
sunk costs (Zeelenberg & van Dijk, 1997). Regarding the
latter category, Zeelenberg and van Dijk (1997) argue
that the sunk cost effect can reverse if a certain monetary
compensation is expected due to the effort invested in
work. In their experiment, participants had to imagine
that they had worked a whole day and were expecting
their payment. Their supervisor either offered to pay
them an amount that had been previously negotiated or
invited them to gamble with the possibility of earning
twice as much as the negotiated salary or earning nothing.
The safe option of receiving the expected payment was
chosen more often than in a control condition, where par-
ticipants did not learn about the events before the choice.
Complementary findings are reported by Arkes et al.
(1994) from a series of studies on windfall gains, that is,
unexpected gains. Windfall gains were more readily in-
vested in risky gambles than expected gains. Thus, in
contrast to financial sunk costs, prior investments of ef-
fort seem to result in risk-averse choices. For tax behav-
ior this would mean that taxable income earned by high
effort is likely to be declared honestly. Even though ef-
fective income could be increased by evading taxes, be-
ing noncompliant would bear also the risk of being au-
dited and paying a fine. If the honestly declared net in-
come corresponds to the aspired compensation of one’s
effort and work, the individual level of aspiration (Hel-
Figure 1. Change of value function in prospect theory de-
pending on the amount of effort put in earning one’s in-
Figure 2. Shift of reference point in prospect theory’s value
function as consequence of expecting compensation for in-
vesting a high amount of effort.
S. Muehlbacher et al.: Hard-Earned Income and Tax Compliance 299
© 2008 Hogrefe & Huber Publishers European Psychologist 2008; Vol. 13(4):298–304
son, 1964; Weiner, 1996), compliance is likely since pay-
ing a fine following an audit would mean falling below
one’s aspiration level and experiencing the feeling of “. . .
having worked for nothing” (Zeelenberg & van Dijk,
1997; p. 682). The notion of an aspiration level serving
as alternative reference point was previously mentioned
by Kahneman and Tversky (1979) in their seminal paper
on prospect theory. Potential consequences of such an al-
ternative reference point are exemplified in Figure 2. In
this Figure, point A represents the gross income, which
is typically used in compliance decisions of the self-em-
ployed who pay taxes out of their own pocket. From this
point the decision about whether to pay any given amount
of taxes (x) occurs in the loss domain, where prospect
theory would predict risk-seeking choices. If, however,
while completing their hard work taxpayers were antic-
ipating their net income as financial compensation for
their work, point B would serve as the reference point,
that is, the expected income. Seen from point B, outcome
(x) from evading taxes lies in the gain domain of the val-
ue function, where risk-averse choices are more likely to
occur (Kahneman & Tversky, 1979).
To summarize our two-sided predictions, we hypothe-
size that either high investment of effort in one’s own job
leads to high valuation of income, and in consequence, to
more tax evasion, or the opposite is true, that is, high effort
put into earning taxable income increases tax compliance
if the tax deduced income meets peoples expectations
the aspiration level. These predictions are tested in eight
countries with varying tax morale and different sizes of
shadow economy. The countries vary in regard to tax rate,
tax practices, and norms. Assuming that the impact of effort
is a general phenomenon, valid independently of cultural
differences, we expect similar effects of effort on compli-
ance in all considered nations.
Eight convenience samples were collected in Australia (Can-
berra), Austria (Vienna), England (Exeter), France (Paris),
Italy (Chieti-Pescara), New Zealand (Christchurch), Spain
(San Sebastian), and Switzerland (Zurich). Overall, 1,223
participants joined the study. Sample sizes in each nation
ranged from 117 to 211. The average age of participants was
22 years (SD = 5). Slightly more females than males partici-
pated (57% vs. 43%), which was especially the case in Aus-
tria and France. A majority of participants were students
and/or working part-time. Detailed sample descriptions for
each country are provided in Table 1.
Material and Procedure
Each participant had to complete one of four versions of a
questionnaire, describing different scenarios about the
work of a freelance architect (to decrease social desirabil-
ity, all text in the questionnaire was worded in the third
person). The work of the architect was either described as
rather easy (Low Effort Condition), with no problems in-
volved in acquiring and completing a profitable project, or
as unusually effortful (High Effort Condition), starting with
difficulties in acquiring a project, which – when the archi-
tect finally was assigned to it turned out to be an annoying
task involving hard work. In both conditions, salary for the
project amounted to 60 800 EUR
. To manipulate the aspi-
ration level, participants were told that typically architects
in comparable projects earn more, that is, 62 300 EUR
(high aspiration level condition) or less, that is, 59 300
EUR (low aspiration level condition).
Subsequently, participants read that the architect consid-
ered including a deduction of travel expenditures and ac-
commodation costs in his tax report. These bills, however,
had been fully covered by the architect’s customer, writing
them off would therefore be not correct. By including the
deduction, effective salary would increase to 63 300 EUR,
but if tax authorities thoroughly check the architect’s tax
report (audit probability was indicated as 33%), a fine has
to be paid and effective salary would be reduced to 55 800
EUR. Participants had to indicate on a 9-point scale how
high they considered the probability to be that the architect
would cheat in his tax report and include the incorrect de-
duction (1 compliance;9–evasion).
Thus, in the four scenarios of the questionnaire effort
and aspiration level were manipulated in a 2 × 2 design
with likelihood of tax compliance as dependent variable.
Note that a satisfactory income in the Low Aspiration Lev-
el Condition would be achieved with an honest tax report,
but in the High Aspiration Level Condition a satisfactory
income can be reached only by cheating in the tax report.
Table 1. Sample description by country
N Sex Age (years)
Female Male MSD
Australia 123 50% 50% 19.7 2.1
Austria 117 89% 11% 24.9 6.6
England 147 44% 56% 19.8 1.3
France 128 71% 29% 20.9 5.0
Italy 187 53% 47% 20.4 1.7
New Zealand 138 64% 36% 20.9 5.7
Spain 211 57% 43% 24.6 7.8
Switzerland 172 37% 63% 22.2 3.1
Total 1223 57% 43% 21.8 5.2
300 S. Muehlbacher et al.: Hard-Earned Income and Tax Compliance
European Psychologist 2008; Vol. 13(4):298–304 © 2008 Hogrefe & Huber Publishers
1 In countries with different currencies, the indicated salary was 60 800 Australian dollars, 60 800 New Zealand dollars and 94 240 Swiss
In the last section of the questionnaire, participants’ tax
morale was measured with a 5-item scale (Taxes contribute
to social equity within a state; Tax evasion is not really a
crime (recoded); Taxes are necessary to assure the func-
tioning of a state; Taxes constrain my freedom of decision
(recoded); In return for the taxes to be paid one doesn’t
receive appropriate rewards (recoded); 1 – disagree to 6 –
agree; Cronbach’s α = .58). Also, participants’ sociodemo-
graphic characteristics were collected.
The questionnaire was carefully translated by native
speakers into the respective national language of the par-
ticipating countries.
Results and Discussion
To test if the eight samples reflect the general tax morale
of the countries they were drawn from, aggregate tax mo-
rale within each country was compared with estimates by
Schneider and Klinglmair (2004; p. 42–45) for the size of
shadow economy in the year 2000. Their estimates were
used in a previous study (Alm & Torgler, 2006), where tax
morale in 15 European countries and the United States was
negatively correlated to the size of shadow economy.
timates from the secondary source and means for our mea-
sure of tax morale for each nation are provided in Table 2.
Whereas Swiss participants had the highest values for tax
morale, the lowest tax morale was found in Italy and Spain.
Figure 3 shows the strong negative correlation between ag-
gregate tax morale and the size of the shadow economy
(Spearman’s ρ(6) = –.83; p = .01). The negative relation-
ship between tax morale and size of the shadow economy
in the eight countries corresponds with previous findings
by Alm and Torgler (2006), and provides some evidence
for the comparability of the observed samples to the nation-
al average.
The hypothesis on the impact of sunk effort on tax com-
pliance was tested in a mixed-model ANCOVA with effort
and aspiration level as fixed factors, nation as random fac-
tor and participants’ ratings on the 9-point tax compliance
item (1-compliance;9-evasion) as the dependent variable.
Participants’ age, sex, and tax morale were included as co-
variates. The mixed-model approach was chosen because
treating nation as random factor ensures generalizability of
any observed cultural differences. By modeling nation as
fixed factor its effects would be valid only for the eight
countries participating in our study. Means and standard
deviations by experimental condition and nation are pro-
vided in Table 3.
Regarding the experimental conditions, tax compliance
was affected by the main effect of effort, F(1, 6.43) = 6.91;
p = .04, and its interaction with the aspiration level,
F(1, 2.67) = 19.73; p = .03. The aspiration level by itself
had no impact on tax compliance, F(1, 5.71) = 0.01; p =
.93. As shown in Figure 4 the main effect of effort caused
a general shift in tax compliance, that is, tax evasion was
more likely in the low effort condition (Estimated Marginal
Mean = 5.02; SE = 0.09) than in the high effort condition
(Estimated Marginal Mean = 4.69; SE = 0.09; Contrast:
F(3, 1129) = 7.14; p < .01). The aspiration level seems to
trigger the effect of effort on compliance. Whereas at low
aspiration levels tax evasion varied with effort (low effort:
estimated marginal mean = 5.10; SE = 0.13; high effort:
estimated marginal mean = 4.61; SE = 0.13; contrast esti-
mate = .24; SE = 0.11; p = .03), tax evasion at high aspira-
tion levels was not affected by effort (low effort: estimated
marginal mean = 4.95; SE = 0.12; high effort: estimated
marginal mean = 4.77; SE = 0.13; contrast estimate = –.09;
SE = 0.11; p = .41).
No main effect of nation was observed, F(7, 10.25) =
Table 2. Tax morale and estimates for the size of the shadow
economy by country
Tax morale Shadow
Australia 3.99 0.69 15.3
Austria 4.04 0.86 10.2
England 4.10 0.78 12.6
France 4.06 1.00 15.3
Italy 3.77 0.92 27.0
New Zealand 4.10 0.84 12.7
Spain 3.85 0.84 22.6
Switzerland 4.24 0.81 8.8
*Estimates were calculated for the year 2000 by Schneider and Klingl-
mair (2004).
Figure 3. Tax morale and shadow economy in the eight
S. Muehlbacher et al.: Hard-Earned Income and Tax Compliance 301
© 2008 Hogrefe & Huber Publishers European Psychologist 2008; Vol. 13(4):298–304
2 Two of the nations in our study, New Zealand and Australia, were not included in the analysis of Alm and Torgler (2006).
1.38; p = .31, but its interactions with effort, F(7, 3.65) =
10.20; p = .01, and aspiration level, F(7, 6.48) = 4.04; p =
.05, indicate that effects of the experimental manipulations
differed across countries. In spite of these interactions the
core interaction effect between effort and aspiration level
was significant as described above. Importantly, the three-
way interaction of nation, effort, and aspiration level had
no impact on tax compliance, F(7, 1129) = 0.14; p = .99.
The covariates tax morale, F(1, 1129) = 4.21; p =.04,
and age, F(1, 1129) = 4.56; p = .03, were significantly
associated with tax compliance, the effect of sex,
F(1, 1129) = 4.56; p = .09, was only marginally signifi-
In summary, hard-earned income was more likely to
be reported honestly than income achieved easily. When
high effort had been invested, tax compliance was espe-
cially high if the aspiration level was low enough to be
satisfied by an honest tax report. Evading taxes in such
a situation would bear the risk of being audited, paying
a fine and achieving lower income than expected. Cul-
tural differences in tax compliance could not be ob-
served, though the impact of effort and aspiration level
seems to vary across nations. Some limitations to the gen-
eralizability of the present study arise from the fact that
participants were mostly recruited from student samples.
Although their average reports of tax morale correspond
with findings from other studies on the shadow economy,
it might be the case that students across cultures are more
similar than average taxpayers are. Such similarities may
be found in the level of income, the level of knowledge,
and education, but also in the level of experience with
taxpaying per se. Another potential limitation is that
choices in the tax compliance problem were without fi-
nancial consequences. Although the correlation between
individual tax morale and tax evasion was in the expected
direction, it was nevertheless small, r(1192) = –.08; p <
.01, suggesting that other factors influenced reported tax
compliance. In follow-up studies, the effect of effort on
tax evasion should be replicated with more tax experi-
enced participants and by providing monetary conse-
quences for the compliance decision.
The observation that tax compliance increases with the
effort invested to earn taxable income is consistent with
prior findings from a laboratory experiment (Kirchler,
Muehlbacher, Hoelzl, & Webley, in press) and is in line
with theory on the reverse sunk cost effect (Zeelenberg
& van Dijk, 1997). Accordingly, the presence of sunk ef-
fort results in adopting a different reference point while
evaluating outcomes of a decision and consequently en-
hances risk-aversion. Supporting evidence for the effects
of such a mechanism is provided by the interaction of
effort and aspiration level we have found in the present
study. Tax compliance was highest if high effort had been
invested and if it was possible to achieve one’s aspiration
Table 3. Tax evasion by work effort, aspiration level and country
Low High
Aspiration level Aspiration level
Low High Low High
Australia 5.25 1.92 5.63 1.59 5.36 1.83 5.54 2.02
Austria 5.17 2.34 4.42 1.98 4.77 1.90 4.80 2.23
England 5.03 1.66 4.74 1.70 4.29 1.71 4.44 1.62
France 4.92 1.92 5.04 1.92 4.35 2.06 4.21 1.79
Italy 5.24 2.21 5.06 2.75 4.79 2.79 4.69 2.33
New Zealand 4.88 1.82 5.29 2.02 4.94 1.83 5.45 1.82
Spain 5.46 2.36 5.37 2.20 4.50 2.15 4.72 2.14
Switzerland 4.76 2.02 4.42 2.27 4.41 2.14 4.46 1.79
Total 5.11 2.06 5.01 2.14 4.64 2.09 4.77 2.03
Note. Tax evasion was measured by a 9-point item (1-compliance; 9-evasion).
Figure 4. Likelihood of tax evasion by effort and aspiration
302 S. Muehlbacher et al.: Hard-Earned Income and Tax Compliance
European Psychologist 2008; Vol. 13(4):298–304 © 2008 Hogrefe & Huber Publishers
level without evading. If the aspiration level was higher
and a satisfying income was achievable only by cheating
in the tax report, tax compliance was lower regardless of
the effort invested.
Our findings on the effect of effort are also compatible
with research on windfall gains (Arkes et al., 1994), where
unexpected gains (such as easily earned income) were more
readily invested in risky ventures (such as tax evasion).
However, the studies by Arkes and his colleagues (1994)
suggest that windfall gains are defined by their unexpect-
edness rather than by the effort invested. In the context of
effort and taxpaying, therefore, the reverse sunk cost effect
seems to be a more plausible explanation.
On a theoretical level, the interaction effect between ef-
fort and aspiration level supports the model of changing
reference points, in line with the results by Zeelenberg and
van Dijk (1997). Effort is important particularly when as-
piration levels are so low that it can be reached by honest
tax reporting. Although the effect of effort for high aspira-
tion levels was not significant, it pointed in the same direc-
tion, that is, higher effort seems to increase tax compliance.
On a practical level, effort seems the more important vari-
able for mainly two reasons. First, for tax authorities aspi-
ration levels are difficult to observe, whereas the amount
of effort a taxpayer has invested could be determined more
easily. Second, aspiration levels depend on a variety of fac-
tors for example, the income level in previous business pe-
riods, by comparison to peers, and might therefore change
over time.
Practical implications from the results need to be drawn
cautiously, and would need additional empirical support.
However, the issue of effort investments and tax evasion
would imply differential audit strategies, depending on the
effort exerted in earning the taxable income. Persons who
earn their income without much effort would, according to
the present results, be more likely to evade taxes. Focusing
audits on this group would promise a higher likelihood of
finding evaders. It is too costly for tax authorities to check
all tax reports for inconsistencies, so knowing where to
look could improve efficiency. That some forms of income
are easily earned seems quite indisputable for example,
capital gains from stocks and bonds. For other forms of
income, the effort exerted may vary more strongly with
personal circumstances and with subjective interpretations.
It seems plausible, for example, that young entrepreneurs
struggle more and have to invest more effort into earning
their income than more experienced entrepreneurs. It might
also be possible to identify demographic characteristics
that are correlated with a tendency to view work as effortful
or easy.
In the words of Zeelenberg and van Dijk, “. . . sometimes
there is too much invested to gamble.” (1997, p. 677).
Translated to the tax setting, sometimes there is too much
effort put into earning one’s money to risk losing even more
by being caught after tax evasion. Although paying taxes
hurts, paying an additional fine would hurt disproportion-
ately more.
This paper is based on a presentation given by the author
as part of an invited symposium at the 26th International
Congress of Applied Psychology, Athens, 2006. We are
grateful to Stefanie Kasper and Anna-Maria Fuchs for their
help in collecting data.
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About the authors
Stephan Muehlbacher is Assistant Professor at the University of
Vienna, Austria. His research focuses on tax compliance and eco-
nomic decisions.
Erich Kirchler is full-time Professor of Psychology at the Univer-
sity of Vienna, Austria. His research interests in economic psy-
chology include money management in the private household,
well-being at work, and tax behavior.
Erik Hoelzl is Associate Professor of Psychology at the University
of Vienna, Austria. His research interests include economic psy-
chology and social psychology, in particular decision making, so-
cial influence, and affective forecasting.
Julie Ashby is currently working on a 14-month ESRC postdoc-
toral fellowship at Exeter, UK. Her interests include social and
economic psychology, and she has published research in this area.
Chiara Berti is Professor of Social Psychology at the Università
degli Studi “G. d’Annunzio” Chieti e Pescara, Italy. Her research
interests in applied social psychology include studies on justice
and juridical psychology.
Jenny Job is a postgraduate fellow at the Australian National Uni-
versity, Canberra, Australia. Her research interests are in the field
of sociology and political psychology, particularly responsive
regulation, trust, and tax behavior.
Simon Kemp is Professor of Psychology at the University of Can-
terbury in New Zealand. His research interests include economic
psychology, autobiographical memory, and the history of psy-
Ria Ursula Peterlik is a PhD student at the University of Vienna,
Austria, with research interest in financial decisions within the
private household in Vietnam.
Christine Roland-Levy is Professor at the University Réné Dés-
cartes, Paris, France. Her research interests in social psychology
focus on social representations of economic phenomena.
Karin Waldherr is currently teaching statistics at the University
of Vienna, Austria. Her main research interests are psychometrics
and eating disorders.
Stephan Muehlbacher
University of Vienna
Faculty of Psychology
Universitätsstraße 7
A-1010 Vienna
Tel. +43 1427747880
Fax +43 1427747889
304 S. Muehlbacher et al.: Hard-Earned Income and Tax Compliance
European Psychologist 2008; Vol. 13(4):298–304 © 2008 Hogrefe & Huber Publishers
... By using proxies for trust in and power of authorities, Batrancea et al. (2016) have identified Italy as a country with low trust and high power (T-P+) and Switzerland as a country with high power and high trust (T+P+). Italy and Switzerland also appear to differ in terms of tax morale, with Swiss citizens having a higher level of tax morale than Italians (Alm & Torgler, 2006;Muehlbacher et al., 2008). ...
... Not only are such findings in line with previous evidence from other methodological approaches (e.g., Alm & Torgler, 2006;Batrancea et al., 2016;Muehlbacher et al., 2008), but they also qualify the nature of both perceived power of authorities (legitimate vs. coercive) and trust in the tax system. In fact, despite the references to tax law enforcement in the press of both countries, the words that are used suggest different connotations of how tax authorities exercise their power (for example, 'search' in a synergistic climate becomes 'hunt' in an antagonistic climate). ...
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Given the inherently hidden nature of tax evasion, research on tax compliance can be challenging. By drawing on the ‘slippery slope’ framework, which suggests that the tax climate in a society can vary on a continuum between antagonistic and synergistic, we test a new tool in tax compliance research by comparing two areas that differ in terms of tax compliance but share the same language: Italy and the Canton of Ticino (Switzerland). After retrieving 3554 tax-related articles published between 2010 and 2016 from national newspapers with the highest circulation in the two considered countries, we performed a lexicographical analysis using the software T-LAB. The results show that the Italian and Swiss national presses depict their respective tax systems and tax authorities in very different ways. An antagonistic tax climate (coercive power of authorities and distrust in the tax system) appears to prevail in Italy, while a synergistic tax climate (legitimate power of authorities and trust in the tax system) prevails in the Canton of Ticino. The tool appears to be effective not only in detecting the tax climate of a country but also in monitoring changes over time, thus allowing policymakers to fine-tune their fiscal policies accordingly. The results also offer insights into the effects of the vicious cycle between the tax climate of a country and the way the press depicts it in terms of tax behaviour.
... This finding is in line with previous research by Hur and Nordgren (2016), which shows that rewards contingent on performance impact employees' desire for money in a positive way. Moreover, the current study also agreed with the notion that the nature of performance-based rewards is flexible (Muehlbacher, 2008), so in the case of money, the more one get the more he/she will desire for. Another study also suggested that most of the organizations give importance to monetary gains (Bates, 2003) in a way that ultimately cultivate materialistic attitudes in their employees, where individuals see work life as instrumental to gain financial gains (Kasser,2006). ...
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This study indicates that the performance incentives increase individuals' desire for money and inculcate materialism in individuals' expose to them. Sales agents from different companies were taken as a sample, where half of the agents were getting fixed pay and half were getting Performance-based pay. The required data was collected through survey questionnaires. Two scales, i.e., material values scale and desire for money, were used to collect the data. Analysis was done applying linear regression analysis. The results showed that the desire for money and materialism increases in individuals through the administration of performance incentives. Next, the two groups of sales agents were compared, which showed a greater desire for money and materialism in performance-based sales persons as compared to individuals who were getting fixed pay.
... Taxpayers are rational individuals and have perceptions as well as decisions to obey or disobey based on their individual interests influenced by both economic and non-economic factors (Allingham & Sandmo, 1972). In addition, tax compliance is also affected by psychology-economics (Muehlbacher et al., 2008). Through this framework, taxpayer compliance is influenced by the trust and power of the authorities. ...
his study evaluates non-compliance of Rural and Urban Land and Building Tax (PBB-P2) in the Special Capital Region of Jakarta. This research is interesting considering the dependence of the Local Government to PBB-P2 revenue. It can be seen from sustainable efforts to maximize PBB-P2 collection. Maximizing property tax collection can be done in two ways, first by increasing the tax rate, and second, by increasing the value of property taxed (tax base). The increase of tax rate or tax base lead to increase in the amount of PBB-P2 borne by citizens as taxpayers (tax liability). This condition can trigger to non-compliance. This study evaluated other factors affecting non-compliance: the location of the property and type of property. This study used panel probit regression method in analizying 275.394 tax ID from tax year 2014 to 2018. The findings show that tax rates, location of property (flooded or flood-free area), and the type of property (apartment or non apartment property) are related to the increase of non-compliance. Only sales value of the property (NJOP) is not related to the non-compliance behaviour.
... Nonetheless, candidates for the higher tax non-compliance of wealthy taxpayers could be different prosocial values or fairness concerns (e.g., 'sucker effect' -the feeling that one contributes much but receives little). Probably, independent of the size of income, the source of income might matter such that hard-earned income is less likely risked in tax evasion compared to income based on windfall gains (Muehlbacher et al., 2008). Metaanalyses indicate that the effect of socio-demographic characteristics are in general low . ...
... Moreover, one may argue that those who lied to obtain an endowment might have been afraid of getting caught cheating and thus held onto their endowment so as to signal confidence that they truly deserve it and to avoid suspicion (for corresponding results on tax evasion, see Kirchler, Muehlbacher, Hoelzl, & Webley, 2009;Muehlbacher et al., 2008). However, in Experiment 1 and 2, our paradigm ensured the highest possible level of anonymity to participants by (a) using a coin-tossing task that completely removes any deterministic link between responses and honesty by design and (b) approximating a double-blind payment scheme, which renders it at least highly implausible that our results are attributable to anxiety of dishonest individuals. ...
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Psychological accounts of dishonesty propose that lying incurs subjective costs due to threatening individuals’ moral self-image. However, evidence is restricted to indirect tests of such costs, thus limiting strong conclusions about corresponding theories. We present a more direct test of the costs of lying. Specifically, if lying is psychologically costly, individuals should feel entitled to gains they obtained through dishonesty – similar to those they actually earned through getting lucky or even investing effort. Correspondingly, in three experiments, we compared individuals’ willingness to share in the dictator game, with varying mechanisms generating the to-be-shared endowment: getting lucky, exerting (cognitive) effort, and lying. We consistently found that individuals were at least as unwilling to share an endowment obtained through dishonesty as an endowment obtained through individual effort or true luck. This suggests that individuals perceived gains obtained through dishonesty as “hard-earned”, thus directly supporting the theory that lying involves psychological costs.
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Sustainable consumption is one of the seventeen sustainable development goals adopted in 2015. Considering the world's capacity, the main source of financing in reaching the sustainable consumption target, which aims for a good and healthy life for every individual, is taxes, as in the other sixteen targets. While the increase in tax revenues contributes positively to achieving the development goals, the increase in tax compliance serves the sustainable consumption targets by increasing tax revenues. In this context, tax compliance is important in terms of financing sustainable development goals. This importance makes it a priority to examine the factors affecting tax compliance. Social norms are among the factors that affect tax compliance, among other factors. Sustainable consumption is also a development goal influenced by social norms. This study aims to examine the relationship between sustainable consumption as a sustainable development goal and tax compliance as a tool serving this purpose. As a result of the field research, it was concluded that there is a relationship between sustainable consumption behavior and tax compliance. In this sense, it can be said that every positive effect of social norms on sustainable consumption behavior can contribute positively to sustainable development by increasing tax compliance and therefore tax revenues.
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This chapter discusses prospect theory as an alternative approach in explaining tax compliance behavior. (Non-)Compliance is frequently modeled as the outcome of a decision under risk, i.e., the choice between a safe option of being compliant and a risky option of not complying with the law. Non-compliance results either in a better or a worse outcome than compliance, depending on whether the behavior is audited and penalized. The most prominent descriptive model to explain risky decisions is prospect theory. Many of this theory's core ideas have been applied in theoretical and empirical studies of compliance. After a brief overview of prospect theory, this chapter summarizes empirical studies as examples for prospect theory inspired compliance research. It closes with a summary and critique of this approach.
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Taxpayers experience different emotions in tax related situations such as collecting documents for filing, contacting the tax authorities to get advice, or experiencing an audit. We replicated a study conducted in Austria with a representative sample of self-employed taxpayers from Italy and discuss similarities and differences in the impact of emotions on tax compliance intentions between the two countries. Using scenarios, we described different situations occurring in the process of paying taxes in a between-subjects design. Results show that the scenarios elicit specific emotion patterns. Relevant emotions can be clustered into four groups: positive emotions, anger, fear, and self-blame. Future compliance intentions are higher if experiences with the tax authorities are positive rather than negative. This effect is partly mediated by specific emotions. Especially emotions related to anger and self-blame shape compliance intentions. While anger seems to play a more important role in Austria than in Italy, we see that positive emotions and emotions related to feelings of self-blame have a similar impact in both countries. We conclude that emotional experiences play an important role in tax compliance decisions. Thus, tax authorities need to take into consideration specific emotions elicited by different tax related activities and in interactions with the authorities. JEL: H26
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Tax evasion is a complex phenomenon which is influenced not just by economic motives but by psychological factors as well. Economic-psychological research focuses on individual and social representations of taxation as well as decision-making. In this book, Erich Kirchler assembles research on tax compliance, with a focus on tax evasion, and integrates the findings into a model based on the interaction climate between tax authorities and taxpayers. The interaction climate is defined by citizens' trust in authorities and the power of authorities to control taxpayers effectively; depending on trust and power, either voluntary compliance, enforced compliance or no compliance are likely outcomes. Featuring chapters on the social representations of taxation, decision-making and self-employed income tax behaviour, this book will appeal to researchers in economic psychology, behavioural economics and public administration.
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How is risk-taking affected by prior gains and losses? While normative theory implores decision makers to only consider incremental outcomes, real decision makers are influenced by prior outcomes. We first consider how prior outcomes are combined with the potential payoffs offered by current choices. We propose an editing rule to describe how decision makers frame such problems. We also present data from real money experiments supporting a "house money effect" (increased risk seeking in the presence of a prior gain) and "break-even effects" (in the presence of prior losses, outcomes which offer a chance to break even are especially attractive).
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Is the effort exerted to earn taxable income considered in compliance decisions? And if so, is hard-earned income or easy money more likely to be concealed from authorities? While economic theory postulates that prior costs should not affect present decisions, psychological research shows that prior investments of money, time, or effort do matter. Findings from previous studies on the impact of effort on abstract decision tasks suggest two contradictory predictions for the context of tax compliance decisions: Either taxable income earned by high effort is subjectively of higher value, and therefore more likely to be evaded, or investments of effort cause a shift of the reference point through the establishment of an aspiration level, resulting in honest declaration of income. Two experiments were conducted to test these predictions. In a business simulation, taxable income was obtained by different levels of effort and consequently had to be reported to authorities. Results show that tax evasion was more pronounced in low-effort conditions. This suggests that effort changes the reference point rather than the slope, and provides evidence that in tax compliance decisions aspiration levels serve as reference points. Implications for tax audits are discussed.
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Using various statistical procedures, estimates about the size of the shadow economy in 110 developing, transition and OECD countries are presented. The average size of the shadow economy (in percent of official GDP) over 1999-2000 in developing countries is 41%, in transition countries 38% and in OECD countries 18.0%. An increasing burden of taxation and social security contributions combined with rising state regulatory activities are the driving forces for the growth and size of the shadow economy. If the shadow economy increases by one percent the annual growth rate of the "official" GDP of a developing country (of a industrialized and/or transition country) decreases by 0.6% (increases by 0.8 and 1.0 respectively).
Decision theory and the theory of rational choice have recently been the subjects of considerable research by philosophers and economists. However, no adequate anthology exists which can be used to introduce students to the field. This volume is designed to meet that need. The essays included are organized into five parts covering the foundations of decision theory, the conceptualization of probability and utility, pholosophical difficulties with the rules of rationality and with the assessment of probability, and causal decision theory. The editors provide an extensive introduction to the field and introductions to each part.
We ran two experiments to test whether people value objects more highly when they obtain those objects due to exemplary performance at a task. In the first, subjects who believed they had obtained a prize due to their performance on a classroom exercise valued it more highly than those who believed they had obtained it by chance. In the second, subjects who obtained a prize due to exemplary performance on a task valued it more highly than those who obtained it due to their poor performance. In both experiments, this ‘source dependence’ effect is approximately equal in strength to the endowment effect, which compares the valuation of subjects with and without the prize. We suggest a possible explanation for this source-dependence effect based on associationism, and rule out two alternative explanations.
Hypothesized that windfall gains are spent more readily than other types of assets. Three questionnaire studies supported this hypothesis and led to the conclusion that the unanticipated nature of windfall gains is responsible for their heightened proclivity to be spent. This hypothesis was then tested in 2 studies using actual money. In both studies, 1 group of male undergraduates was told 1 to 5 days before an experiment that they would be paid for their participation, whereas another group was told about the money only after they arrived at the experiment. In the 1st cash study, those who were given no forewarning of the money bet significantly more during a gambling game than did those who anticipated the payment. In the 2nd cash study, those who did not anticipate the money spent more money at a basketball game than did those who anticipated the money. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
The sunk-cost effect, an irrational attention to non-recoverable past costs while making current decisions, has been documented widely in the domain of monetary costs. In this paper, I study the effect of past time investments on current decisions. In three experiments using choice situations, I demonstrate that the sunk-cost effect is not observed for past investments of time, but the effect reappears when the investments are expressed as monetary quantities. I further propose that this ‘pseudo-rationality’ is due to the fact that individuals lack the ability to account for time in the same way as they account for money. In two additional experiments, I facilitate the accounting of time and show that the irrational sunk-cost effect reappears. In a final experiment, I test my propositions in a setting where subjects make real investments of time and subsequently make real choices. Copyright © 2001 John Wiley & Sons, Ltd.
The sunk cost effect refers to the empirical finding that people tend to let their decisions be influenced by costs made at an earlier time in such a way that they are more risk seeking than they would be had they not made these costs. This finding seems to be in conflict with economic theory which implies that only incremental costs and benefits should affect decisions. The effect is often explained in terms of prospect theory of (Kahneman, D., Tversky, A., 1979. Prospect theory: An analysis of decision under risk. Econometrica 47, 263–291), suggesting that sunk costs may induce a ‘loss frame,’ consequently causing risk seeking behavior. We argue that sunk costs may also result in risk aversion. In the present study we investigated the effect of time and effort investments (Behavioral Sunk Costs) on risky decision making in gain and loss situations. The results show that, in agreement with prospect theory, participants were more risk averse in gain situations than in loss situations. Moreover, incurring Behavioral Sunk Costs appeared to increase risk aversive choices, i.e., a reverse sunk cost effect. Furthermore, the results suggest that, in loss situations, Behavioral Sunk Costs mainly lead to risk aversive behavior if opting for the ‘safe’ alternative is not accompanied by an increased possibility to regret the decision.